10 views on the market from Jeremy Grantham

The effects of a permanent lower-rate regime

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Mr. Grantham writes that the Fed-engineered low interest rate period has given us a sneak preview of what a permanently lower-rate regime might look like. According to Mr. Grantham, the artificially low T-Bill rates will first work their way slowly up the curve. Next, high-yield stocks — “the most obviously competitive type of equities” — begin to be bid up ahead of the rest of the market [“as has happened,” he notes]. The low rate competition then filter into securities that are historically sought after for their higher yields, including “higher-grade real estate, where the ‘cap rates’ slowly fall; and, unfortunately, also forestry and farmland, mainly of the larger and more standard varieties that appeal to institutions, which show declines in their required yields, i.e., their prices rise.” The longer the rates stay below true market rates, the higher asset prices become, which leads corporate assets to sell “way over” replacement cost, Grantham writes. “Then, if the heart of capitalism is still beating at all, a long period of over-investment begins and returns are bid down and everything moves into balance, often helped along if asset prices get too high, as in 2000 and 2007, by a good healthy market crunch.”